A Longer Term Look

While the corporate lackeys on CNBC continue to try and bilk the remaining retail investors, and convince the last few mom and pops out there saving for retirement that the market is cheap, and of good value, a look at some long term indicators of value tells a different story. Analysts, corporate shills, economists, Cramer, the major investment research houses, and the regular gurus making the rounds on the media outlets all agree; 2011 will be a great year. As Bob Farrell noted in his rules, "When all the experts and forecasts agree -- something else is going to happen."

Chart 1: The Shiller PE Ratio (courtesy of www.multpl.com)

First, the long term average is about 16. So assuming paying 16 dollars for 1 dollar of earnings is historically a fair value, the market at 23 is overpriced by 40%. But since earnings typically fall at the same time price, 40% is most likely a conservative estimate. Second, notice that in the long term, prices oscillate up, then down, then up etc etc. Bob Farrell's rule 2: "Excesses in one direction will lead to an opposite excess in the other direction." Not only are stocks expensive still, but prices are still mean reverting from the most historically overbought period ever. It stands to reason that not only will the market mean revert, but have an equal and opposite reaction. Meaning, I doubt stocks will simply "correct" but will instead trek lower for years, way beyond what almost anyone thinks possible. 

Chart 2: S&P Dividend Yield (courtesy of www.multpl.com)

Looking at the dividend yield on the S&P, we get a similar view. The yield oscillates as investors either demand safety or flee safety for risk. Investors today are historically very complacent, and even the huge crash in 2008 didn't bring the yield back to the historical mean. Until these two long term measures come to at minimum, back to their long term means, I think its very presumptuous of analysts, gurus, etc to be proclaiming the market is "cheap" or represents good value. If history rhymes; a bullish consensus plus long term indicators of value historically high, the next several years will in fact be rather tumultuous, and not the cake walk that most are now calling for.